Rupee and Sensex tumble on a day when RBI keeps repo rate unchanged
The Reserve Bank of India on Friday held the interest rates unchanged at 6.50 per cent, in contrast with the market expectations. However, the central bank changed the monetary policy stance to ‘calibrated tightening’ from ‘neutral.’
RBI's move came against the street expectations as most of the experts were looking forward to a 25-50 basis points hike in the Repo rate.
The domestic equity market witnessed a 200 point drop post the announcement. The BSE Sensex, which had been falling for the past two days, plunged 792 points on Friday to end at a near six-month low of 34,376.99.
According to the brokers, apart from the RBI policy announcement, the market sentiments were also bearish due to a sell-off in global markets as US Treasury yields surged to multi-year highs on robust economic data and comments from the Federal Reserve, sparking fears of accelerating inflation.
The Rupee meanwhile crashed below the 74-mark on Friday against the US dollar for the first time ever. The domestic currency was quoting 65 paise lower at 74.23 (intra-day) against the dollar soon after the monetary policy announcement.
The rupee has slumped in recent months amid a global rise in oil prices and a sell-off in emerging markets. It has fallen more than 13 per cent since January, making it the worst performing major Asian emerging market currency.
For those wishing to know more about Repo rates, here is a brief explainer
What is Repo rate?
A repo rate is a rate at which the central bank of India lends money to its commercial banks in case the banks are short of funds. The monetary body will increase/decrease the repo rate in order to control inflation.
When will the RBI increase or decrease Repo rate?
When there is an inflation, the central bank will increase the repo rate making it difficult for the banks to borrow money from it. This, in turn, will reduce the money supply in the economy and hence the inflation will come down. Likewise in the event of deflation, the RBI will reduce the rates and increase the money flow in the economy.
(With inputs from agencies)